Progressive Northern Insurance Co. v. Corder

15 S.W.3d 381, 2000 Ky. LEXIS 38, 2000 WL 426376

• Court: Kentucky Supreme Court
• Decided: April 20, 2000
• Docket: 98-SC-0392-CL
• Status: Published

Opinions

LAMBERT, Chief Justice.

Pursuant to CR 76.37(1), this Court granted the certification request of the United States Court of Appeals for the Sixth Circuit to answer the following questions of Kentucky law:

(1) When an insurance policy is allegedly procured by omissions or misrepresentations by the insured, is the insurer able to rescind coverage to avoid liability to innocent injured third-parties?

and

(2) If the insurer is prohibited from rescinding coverage, does the Kentucky Motor Vehicle Reparations Act (“MVRA”), KRS 304.39-101, et seq., govern the amount the insurer is responsible for when an innocent third party is injured?

To resolve these issues of first impression, we must consider the right of an insurer to be protected from misrepresentation committed by its insured and this Commonwealth’s public policy favoring compensation for persons injured in motor vehicle accidents.

This case arose as the consequence of a motorcycle accident involving a vehicle owned and insured by Roy Stinnett, Jr., and driven by his then 20-year-old son, Jason Stinnett. In July 1995, Roy Stin-nett applied for and was issued motorcycle insurance with Progressive Northern Insurance Company. The insurance application listed Roy Stinnett as the only operator of the motorcycle. The policy became effective on July 20, 1995 and contained liability limits of $250,000 per person and $500,000 per accident. On October 19, 1995, Jason Stinnett was operating the motorcycle and Melissa Corder was riding as a passenger. Both were injured in a single vehicle accident. All premium payments were current at the time of the accident.

On March 19, 1996, Corder, the injured passenger filed suit in Fayette Circuit Court against both Roy and Jason Stin-nett. Corder also sued her father’s insurer, State Farm Mutual Automobile Insurance Company, claiming benefits under the uninsured and underinsured motorist provisions of its policy.

On April 8, 1996, Progressive filed a declaratory judgment action in the United States District for the Eastern District of Kentucky, seeking a declaration that Roy Stinnett’s motorcycle insurance policy “is rescinded and null and void ab initio ” on grounds that the insured had made material misrepresentations in his application, i.e., listing himself as the only operator of the motorcycle. Relying on National Ins. Ass’n v. Peach, Ky.App., 926 S.W.2d 859 (1996), which held that an insurer was precluded from rescinding an insurance contract as to persons who were not parties to the misrepresentation, the court entered summary judgment against Progressive. Progressive appealed to the United States Court of Appeals for the Sixth Circuit, which requested certification of the aforementioned questions of law.

Progressive now contends that the insurance policy was fraudulently procured not for the insured, Roy Stinnett, but for his son, Jason. Progressive points out that Jason was the only licensed motorcycle operator in the Stinnett family and that he was the primary operator of the motorcycle. Further, had it known that Jason would be the primary operator of the motorcycle, the premium for the policy would have been $3,588.40 rather than the $646.00 paid by the insured. Progressive alleges that this price differential was known to the insured and was the reason he misrepresented on his application that he would be the sole operator of the motorcycle.

Progressive seeks to have the insurance contract rescinded. A recission avoids the contract ab initio whereas a cancellation merely terminates the policy as of the time when the cancellation becomes effective. In other words, cancellation of a policy operates prospectively, while recission, in effect, operates retroactively to the very time that the policy came into existence.

L. Russ and T. Segalla, Couch on Insurance § 30:3 (3d Ed. Clark, Boardman, Callaghan 1996). In support of its claim, Progressive argues that recission of the insurance contract is allowed by KRS 304.14-110, which provides in relevant part:

All statements and descriptions in any application for an insurance policy or annuity contract, by or on behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, and incorrect statements shall not prevent a recovery under the policy or contract unless either:

(1) Fraudulent; or

(2) Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or

(3) The insurer in good faith would either not have issued the policy or contract, or would not have issued it at the same premium rate, or would not have issued the contract in as large and amount, or would not have provided coverage with respect to the hazard resulting from the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.

KRS 304.14-110 reflects a public policy requiring “those who apply for insurance [to] be honest and forthright in their representations.” State Farm Mut. Auto Ins. Co. v. Crouch, Ky.App., 706 S.W.2d 203, 207 (1986).

There is merit to the argument that KRS 304.14-110 allows recission when applied to an injured insured. See Crouch, 706 S.W.2d 203 (holding that an insurer could rescind an insurance policy when the claimant was the injured insured who had engaged in material misrepresentations). On the other hand, the application of KRS 304.14^110 to defeat recovery to an innocent, injured third party would undermine the public policy of compulsory liability insurance in this Commonwealth. As noted in Peach, a major objective of the MVRA is “to insure continuous liability coverage in order to protect the victims of motor vehicle accidents and to insure that one who suffers a loss as the result of an automobile accident would have a source and a means or recovery.” 926 S.W.2d at 861 (citing Crenshaw v. Weinberg, Ky., 805 S.W.2d 129 (1991)). Furthermore, the MVRA is remedial legislation that should be construed to accomplish these objectives. Beacon Ins. Co. of America v. State Farm Mut. Ins. Co., Ky., 795 S.W.2d 62 (1990).

This Commonwealth’s commitment to ensuring recovery for injuries sustained in motor vehicle accidents is clearly expressed in the provisions of the MVRA. KRS 304.39-080(5) requires every owner of a motor vehicle registered or operated in Kentucky to provide continuously an insurance contract or other security for payment for basic reparations benefits and tort liabilities arising from the use of the vehicle. KRS 304.39-085 requires every insurance company to report all insured persons whose policies have been terminated by the Department of Vehicle Regulation. KRS 304.39-090 prohibits a motor vehicle owner who ceases to maintain security from operating or permitting the vehicle to be operated in Kentucky.

Recission of an insurance contract after an accident would strike at the heart of compulsory liability insurance and would operate as the functional equivalent of a contractual exclusion from minimum liability coverage. Such an exclusion was held to be improper in Bishop v. Allstate, Ky., 623 S.W.2d 865, 866 (1981), because it contravened the purpose of compulsory automobile insurance, which is “to assure that a driver be insured to a minimum level.” The result urged by Progressive would likewise defeat minimum coverage, with the consequence that an innocent, injured third party would bear the burden of intentional misrepresentations by the insured. It would shift the loss to one who was entitled to rely on obedience to the law and one who was without any means of determining whether a policy had been fraudulently procured. As between the injured third party and the insurer, the latter is in the far superior position to protect itself. The insurer may accept or reject policy applicants and it possesses the skill and wherewithal to make sound underwriting decisions.¹ Therefore, Progressive may not rescind the contract to avoid liability to Corder. This result has been reached across the country in other jurisdictions with compulsory insurance statutes. See Peach, 926 S.W.2d at 861 (providing a list of these jurisdictions).

Although Corder must be allowed to recover damages under the Stinnett policy, she may recover only up to the minimum amount of liability coverage required by the MVRA. The MVRA is a self-contained Act, and its provisions must be read consistently. Thus, since the public policy behind the Act governs the availability of recovery, it also must govern the amount recoverable. KRS 304.39-110 sets forth the minimum sums. The public policy expressed in the Act is that every victim of a motor vehicle accident will be able to recover the statutory minimum sum towards satisfaction of any judgment obtained. No public policy would be advanced by enforcing contractual terms that exceed the required coverage. In so holding, the competing interests of the insurance company and the public policy of this Commonwealth are equitably balanced.

In summary, where loss must be borne by an innocent third party or by an insurance company which has written a policy pursuant to a compulsory insurance statute and accepted a premium therefor, it should be the insurance company that bears the loss up to the minimum statutory limits. Whether a particular injured third party has or has not a policy of uninsured motorist or underinsured motorist coverage is inconsequential. Our concern here is with the relationship between the injured third party, the negligent defendant, and the insurance company which provides indemnity for the claim.

Our decision here does not leave Progressive without a remedy. If Progressive’s insured, Roy Stinnett, Jr., fraudulently induced the company to issue the policy, Progressive could assert a claim for fraud against him for any damages suffered as a result of alleged fraud in the procurement of the policy.² If Progressive’s allegations of fraud are true, Roy Stinnett should be ultimately responsible for Corder’s damages, but Progressive, not Corder, should be the one to look to him.

The law of Kentucky is hereby certified to the United States Court of Appeals for the Sixth Circuit.

GRAVES, KELLER, STUMBO, and WINTERSHEIMER, JJ., concur. COOPER, J., dissents by separate opinion in which JOHNSTONE, J., joins.

1 . Parenthetically, we observe that Progressive issued a motorcycle liability insurance policy to one who did not possess a motorcycle operator’s license.

2 . New York Life Ins. Co. v. Hord, Ky., 77 S.W. 380 (1903) (Court held that an action based on fraud in the procurement of a life insurance policy could not be maintained if benefits were paid with knowledge of the fraud, implying that such an action could otherwise be maintained.); Agricultural Ins. Co. v. Superior Court, 70 Cal.App.4th 385, 82 Cal.Rptr.2d 594, 596 ("an insured — no different than everyone else — has a duty not to defraud. Firstly, an insured must not defraud in the procurement of the policy.”); Moss v. Mt. Morris Mut. Ins. Co., 582 N.W.2d 503, 506 ("Mt. Morris acknowledges that an insurer may claim subrogation against its own insured only in cases of fraud, in order to place the responsibility for damages upon the one who caused the loss”).